Shenzhen SDG Information Co., Ltd. (SZSE:000070) shares have had a horrible month, losing 26% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 25% in that time.

Since its price has dipped substantially, Shenzhen SDG Information may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.3x, considering almost half of all companies in the Communications industry in China have P/S ratios greater than 3.8x and even P/S higher than 7x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

What Does Shenzhen SDG Information's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Shenzhen SDG Information, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shenzhen SDG Information's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.5% last year. The solid recent performance means it was also able to grow revenue by 16% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 50% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shenzhen SDG Information is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Shenzhen SDG Information's P/S Mean For Investors?

Having almost fallen off a cliff, Shenzhen SDG Information's share price has pulled its P/S way down as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Shenzhen SDG Information revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you settle on your opinion, we've discovered 4 warning signs for Shenzhen SDG Information (3 are a bit concerning!) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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